How Courts Divide Assets and Debts in Divorce

According to the Centers for Disease Control and Prevention (CDC), there were 672,502 divorces and annulments reported in 45 states and Washington, D.C. in 2023. Those jurisdictions had a divorce rate of 2.4 per 1,000 people.

Separately, the U.S. Census Bureau’s 2024 American Community Survey estimated that there were 986,810 women aged 15 years and older who divorced in the past 12 months.

Divorce may be the beginning process of ending a marriage. But it’s important to understand that there are several other factors involved in this process. Couples undergoing divorce must also determine how to divide their properties, savings, and retirement accounts. It also includes dividing real estate assets and even outstanding debts.

In the United States, courts generally follow either equitable distribution or community property rules, depending on the state. But is SC a 50/50 divorce state?

Let’s take a closer look at how courts divide assets and debts in divorce.

Two Main Systems

There are generally two choices for the system selected by the state. Very few select the community property system. According to the information provided in IRS Publication 555, there are nine states with a community property system.

In community property states, assets and income earned during the marriage are generally considered property of both spouses.

Other states use the equitable distribution system. This means that the judge tries to divide the marital estate in a manner that is deemed just and proper in light of the facts of the particular case. The judge may consider a number of factors as mandated by the state statute.

Equitable Does Not Always Mean Equal

One of the biggest myths about the divorce process is that everything is going to be divided equally between the spouses. This is not the case in equitable distribution states.

South Carolina adheres to equitable distribution instead of splitting everything fifty-fifty. The state looks at marital assets and takes into account things like the duration of the marriage and the contributions of both spouses financially and otherwise. These factors give courts flexibility to determine a fair division based on each family’s situation.

Common factors taken into consideration in equitable distribution states are the duration of the marriage, incomes and earning capacities of both parties, contribution to the marriage through homemaking and raising children, health of both parties, and tax considerations of the proposed division.

Marital Property Versus Separate Property

For any kind of division to occur, the court needs to determine what goes into the pot. States have laws that categorize marital or community property, which is usually acquired during the marriage, and separate property, which may include assets owned before marriage, gifts, and inheritances. A family law attorney can help explain how these rules apply to a couple’s financial situation.

There may be some gray areas where it becomes difficult to determine what percentage of the asset has been marital property. For example, a house purchased prior to the marriage but partly paid for with joint funds or an inheritance kept in the joint bank account could pose such challenges.

Community property states also involve these questions, and courts there often see complex cases involving businesses and investments.

Debts Are Divided Too

Divorces involve more than dividing assets. Mortgages, auto loans, balances on credit cards, and any other debt acquired during the marriage are normally included in the division process too.

There is one practical issue that many people overlook when discussing divorce settlements. While a divorce settlement document determines who pays what, it does not affect the agreement the debtor made with the lender.

If the names of both spouses are involved in the transaction, and one stops making payments, the creditor can go after the other.

Retirement Accounts and Taxes

Retirement savings are often among the largest marital assets. Dividing an employer plan requires a special court order.

The IRS explains in Publication 504 that a qualified domestic relations order can allow retirement plan benefits to be paid to a spouse or former spouse. The same publication describes rules that allow property transferred between spouses as part of a divorce to move without immediate recognition of gain or loss, while the recipient keeps the original tax basis.

Two assets with the same current value can carry very different future tax costs, which is why tax consequences are often part of the conversation.

Agreement or Court Decision

Most couples resolve disputes concerning property by negotiations or mediation. Agreement between the spouses provides for more control and is less costly than litigation. In case they fail to reach an agreement, the court makes a decision depending on the laws of the state and the facts of the case.

Looking Ahead

Separating a shared financial life can be complicated, but knowing the general structure helps. It is essential to know whether one’s state follows the community property rule or the equitable distribution rule and what constitutes separate property.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal advice. For specific legal concerns regarding divorce and asset division, it is advisable to consult with a qualified attorney who can provide guidance based on individual circumstances.